What may hurt Google's Android business

Google wants the world to know that it has grown into a new identity - it is a mobile company now.
The financial report it issued Thursday reflects the growing pains
that have accompanied the transformation, 'New York Times' reports.Advertising,
Google's main business, does not always make as much money on phones as
it does on computers, and the price that advertisers pay for clicks on
Google ads has decreased 16 per cent since last year. And Motorola
Mobility, the mobile device maker that Google now owns, is losing money.

Still,
Google continues to chug along in its vast search advertising business
and make headway in newer businesses like display advertising. Its core
business, not including Motorola, had net revenue of $8.36 billion, less
than the $8.41 billion that analysts had expected but up 21 per cent
over last year.

Google did not break out net income for the two
businesses, but for the combined company it climbed 11 per cent. Google
shares were up 2 per cent in after-hours trading.

Google's
blossoming mobile strategy makes it even harder to differentiate among
the big technology companies. Google, Apple, Microsoft and Amazon each
have mobile devices, apps and cloud storage. And it is in those areas
that the tech giants are competing.

In June, Google introduced
the Nexus 7, a sleek seven-inch tablet to compete with the iPad, the
Kindle and the Surface. It also showed the Nexus Q, for home
entertainment; internet-connected Google Glasses; and a new version of
its Android mobile operating system, Jelly Bean.

The idea is to
offer mobile devices so more people use Google services everywhere they
go, instead of devices and services from competitors.

"All of the
combatants in the intergalactic race for supremacy appear to be
launching consumer products and hardware," said Jordan Rohan, an
internet analyst at Stifel Nicolaus. "Google's management team realizes
that if consumers lock into the Apple ecosystem, it's going to be hard
to sell them Android devices in the future."

But while Google is
meeting people on the devices they want to use, analysts are closely
watching whether it can make as much money on mobile devices as it has
on desktop computers.

People have long described the price
difference between print and web ads as moving from analog dollars to
digital dimes. Cellphone ads could be described as trading those dimes
for mobile pennies. Clicks on mobile ads cost about 40 per cent of the
price of desktop ads, according to Stifel Nicolaus. That is because
there is more inventory with the addition of mobile ads, and that could
keep some Google users from seeing ads on computers. In addition, people
are less likely to make purchases on their phones.

"The reality
is when your click prices are going down, it means that advertisers are
paying less for your inventory," said Colin W Gillis, a technology
analyst at BGC Financial.

Google executives said the decline in
ad prices was mostly because of foreign exchange rates, that the mobile
ad business was healthy and that mobile searches were not cannibalising
desktop searches.

"We believe that mobile searches are mostly
incremental," said Susan Wojcicki, senior vice president for
advertising. "For example, on weekends when users are out and about we
see a rise in mobile activity and when users come back on Monday we see a
rise on desktop."

Google dominates mobile advertising with 95
per cent market share for search ads and 52 percent market share for all
types of mobile ads, according to eMarketer. The number of paid clicks
on Google ads increased 42 per cent over last year.

In a
statement, Larry Page, Google's chief executive, called it a "strong
quarter" with "a bunch of exciting new products" and said that with the
acquisition of Motorola, "we're excited about the potential to build
great devices for users."

Page did not speak to analysts on the
earnings conference call, however, because of an ailment that has left
him unable to speak for weeks. Although analysts said his health is an
ongoing risk, Google executives declined to offer details.

"Larry
has lost his voice, and we said that means he cannot do any public
speaking engagements at the time, including today's earnings call," said
Nikesh Arora, Google's chief business officer. "But he's here and
continues to run the company and is involved in any strategic decisions
we're making."

Google reported second-quarter revenue of $12.21
billion, up 35 per cent from $9.03 billion in the year-ago quarter. Net
revenue, which excludes payments to ad partners, was $9.61 billion, up
from $6.92 billion. Net income rose to $2.79 billion, or $8.42 a share,
from $2.51 billion, or $7.68. Excluding the cost of stock options,
Google's second-quarter profit was $10.12 a share, compared with $8.74
last year.

Analysts scrambled to make sense of Google's earnings
report because for the first time it included Motorola, but not full
quarterly results for the device maker because the acquisition closed
May 22. Motorola lost $233 million on $1.25 billion in revenue during
that period - results that analysts called "frightening."